Forgoing More Tax Cuts Is the Price of War

These anxious fall days may be remembered as the moment when the full costs of the war against terrorism began to snap into focus.

In Afghanistan, the hope that the Taliban might quickly crumble under a high-tech aerial bombardment has itself crumbled. It now appears the rebel Northern Alliance is unlikely to dislodge the Taliban without substantial U.S. help on the ground, not just in the air.

At home, the anthrax attacks are daily adding zeros to the price of restoring a measure of security to a shaken society. The Postal Service is racing to sterilize the mail; public health officials are scrambling to stockpile medicine. All of that is landing atop the huge costs of revamping the airline security system. Demands also are mounting to increase security in other critical systems--like the food and water supply--before they are targeted.

Against this backdrop, the debate over taxes now underway in Washington seems to be unfolding in a time warp. At home and abroad, the pressures all point to mounting federal bills. And yet, in the name of economic stimulus, House Republicans last week pushed through a tax cut that will cost nearly $200 billion over the next five years--just months after Congress passed and President Bush signed the largest tax cut in 20 years.

Economists in both parties support at least some temporary tax cuts to jolt the sagging economy. But the House bill also included a series of permanent new cuts in corporate and personal taxes, including a reduction in the capital gains tax and a retroactive elimination of provisions designed to ensure that profitable corporations pay a minimum amount of tax.

These proposed new tax breaks--indeed, even the ongoing reduction in personal income tax rates approved in last spring’s $1.3-trillion tax cut--aren’t the way America usually marches into combat. Most often, the United States has raised taxes to fund the demands of war. Americans have not always been happy about reaching into their wallets. But when the nation is under arms, those at home have always accepted higher taxes to support those on the front line.

“We have no precedent in American history for lowering taxes as we went to war,” says Will Marshall, executive director of the Progressive Policy Institute, a centrist Democratic think tank. “We raised them to get everybody to sacrifice for the war.”

The federal government’s first income tax was imposed to help fund the Civil War. To pay for World War I, Washington raised the top income tax rate to 77%. Rates declined after the war, but to build the arsenal of democracy against Adolf Hitler and imperial Japan, Franklin D. Roosevelt both broadened and sharpened the tax burden: the top rate temporarily soared to 91% and the number of Americans subject to the income tax jumped from 4 million to 43 million. Even during Korea, a much more limited conflict, income tax rates rose.

No one is seriously proposing to raise taxes today. But it’s reasonable to ask whether the country can afford more tax cuts. Under the triple blow of the terrorist attack, the initial tax cut approved this year and the slowing economy, the federal budget picture has collapsed faster than the Seattle Mariners against the New York Yankees. The latest forecasts project that in both 2002 and 2003, Washington will spend all of its general tax revenue, all of the surplus in Social Security and add billions of dollars in new debt besides. The government is now on track to divert Social Security money into general operations--something both parties had pledged not to do--at least through 2006.

In that environment, it may be difficult to argue for tax cuts beyond short-term measures to invigorate the economy, such as a temporary tax credit to encourage business investment. It may even become impossible to avoid asking whether the country can still afford all of the tax cuts approved last spring.

Without much notice, House Democrats opened that debate last week in their failed alternative to the GOP stimulus plan. To pay for their own stimulus proposals (primarily a tax rebate for lower-income working families and extended unemployment benefits), the House Democrats proposed to freeze part of the cut in the top income tax rate approved in the spring. The proposal would have upheld the reduction in the top rate that went into effect this year, meaning no one would pay higher taxes than they are now. But the plan would have deferred two further cuts in the top rate due in 2004 and 2006. That alone would have saved $91 billion over the next decade.

The House Democrats weakened their case by larding their bill with too much spending unrelated to the terrorist crisis. But they framed the right question, which is more than Senate Majority Leader Tom Daschle (D-S.D.) has been willing to do. Among Senate Democrats, talking about taxes has been as popular lately as opening the mail. Daschle has resisted any discussion of revisiting the tax cut, on the grounds that it was unlikely to pass the Senate--and would face an inevitable Bush veto if it did.

In practice, the top Senate Democrats are playing a waiting game. Their private hope is that the increasing pressure on the federal budget will eventually force Bush himself to propose scaling back the tax cut. But the administration is moving in the opposite direction. At a closed-door meeting with Senate GOP leaders last week, sources present say Treasury Secretary Paul H. O’Neill promised the administration would back a congressional push to accelerate the rate reductions approved last spring.

Accelerating the rate cuts would make it much tougher to reconsider them later on, even if the war’s cost proves greater than anticipated. It’s obviously more difficult to repeal a tax cut already in place than to defer reductions promised for the distant future. With the terrorism bills piling up, the tax cut speed-up probably won’t pass. But the emergence of the proposal should remind Senate Democrats that they can’t indefinitely avoid discussing whether the country can still afford the generous tax cut Congress passed during what now looks like a distant peacetime era.

The armed forces are accepting the risk of combat. Police and fire departments and public health workers are accepting the risk of emergency response. Eventually, Congress and Bush will have to bear the fainter risk of honestly paying for all of those sacrifices.

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Ronald Brownstein’s column appears every Monday. See current and past Brownstein columns on The Times’ Web site at: http://161.35.110.226/brownstein.